No room for errorIn 2008 a money market fund called Reserve Primary owned some Lehman Brothers bonds. Then Lehman Brothers went bankrupt, causing the per-share price of the Reserve Primary fund to fall from $1.00 to $0.985.

By any sensible measure this was not a big deal. Investors lost 1.5% of their money. It happens. It was less than they gave up to inflation in the previous 3 months.

But the money market funds spent years convincing investors they could enjoy high returns with no chance of loss. So the tiny dip in Reserve Primary led to a run and near collapse of the entire money market industry. It was one of the lead causes of the 2008 financial crisis, and a reminder that a small loss mixed with unreasonable expectations is far worse than a huge loss with reasonable expectations.

Unless someone with deep pockets has explicitly insured your outcome, you, your family, your friends, your advisors, your employers, and your politicians will screw up from time to time. It’s usually not a big deal. But the trifecta of obliviousness, leverage, and unrealistic expectations can cause small mistakes to snowball into catastrophic losses. Look hard enough and you’ll see that most long-term wealth isn’t caused by prescience, but the opposite: room for error.

Wrong about what it means to be wrongSay it’s 2006, and I predict the housing market is a bubble and its inevitable collapse will cause a huge recession and bear market.

Then those exact things happen.

Was I right?

Probably not.

A handful of investors predicted the financial crisis before 2008. They were called heroes and financial geniuses. But most of them were right for the wrong reason.

Most predicted surging interest rates and a collapsing dollar would cause the impending crisis. Instead, interest rates fell to negative levels and the dollar surged to the highest level in years.

Here’s what Peter Schiff — one of the guys who predicted the crash but got the mechanics backwards — said in Dec. 2006: “Interest rates are one of the problems for the housing market, and they’re going a lot higher.” The 10-year Treasury bond yielded 4.7% that day. Six years later it was at 1.5%, an all-time low.

“Most people, whether bull or bear, when they are right, are right for the wrong reason,” blogger Jesse Livermore wrote.

People are wrong so often that being right for the wrong reason feels good enough to call it a win. The irony is that being right for the wrong reason is worse than just being wrong, because it falsely inflates your confidence about future predictions.

Constantly smilingPsychologists Lauren Alloy and Lyn Abramson have shown that those with mild depression have a more realistic assessment of the future than most people. They’re better at predicting their longevity, odds of unemployment, odds of divorce, and the likelihood of illness.

In her book The Optimism Bias, Tali Sharot wrote:

Optimism protects us from accurately perceiving the pain and difficulties the future undoubtedly holds, and it may defend us from viewing our options in life as somewhat limited. As a result, stress and anxiety are reduced, physical and mental health are improved, and the motivation to act and be productive is enhanced.

Relentless optimism, in other words, is a great way to live a happy life. But it’s a form of ignorance, blinding us to the realty that the history of almost everything is filled with failure, disaster, ruin and scandal.

Optimism wins in the long run, but only if you can ride out inevitable bouts of pain and bad luck. Too much optimism prevents you from doing that. Embracing the reality of how the world works requires you to be a little bit depressed.

Poor imaginationWhen Warren Buffett started looking for a successor he said he needed “someone genetically programmed to recognize and avoid serious risks, including those never before encountered.”

Preparing for risks “never before encountered” requires imagination. Or at least it requires the ability to think beyond spreadsheets and historical data.

Ten years ago, Lehman Brothers going bankrupt, the federal government shutting down, bond yields going negative, and printing $3 trillion of money without sparking inflation could hardly be imagined. But they all happened.

In his book Antifragile, Nassim Taleb wrote:

Risk management professionals look in the past for information on the so-called worst-case scenario and use it to estimate future risks — this method is called “stress testing.”

They take the worst historical recession, the worst war, the worst historical move in interest rates, or the worst point in unemployment as an exact estimate for the worst future outcome.

But they never notice the following inconsistency: this so-called worst-case event, when it happened, exceeded the worst case at the time.

I have called this mental defect the Lucretius problem, after the Latin poetic philosopher who wrote that the fool believes that the tallest mountain in the world will be equal to the tallest one he has observed. We consider the biggest object of any kind that we have seen in our lives or hear about as the largest item that can possibly exist.

People say “I’m saving for a house” or “I’m saving for vacation,” but “I’m saving for an unknown future event or opportunity that I can’t comprehend today” makes you sound paranoid. Given enough time, though, it’s one that nearly all of us will benefit from.

“Individuals with the highest levels of optimism have twice the odds of being in ideal cardiovascular health compared to their more pessimistic counterparts,” said lead study author Rosalba Hernandez. “This association remains significant, even after adjusting for socio-demographic characteristics and poor mental health.”

The study analyzed the mental health, physical health and levels of optimism of 5,100 adults ranging from 45 to 84 years of age. Heart health scores—based on American Heart Association-approved metrics including blood pressure and body mass index—increased alongside levels of optimism.

This isn’t the first study that has linked overall positivity to heart health. In 2012, Harvard researchers found associations between optimism, hope, and overall satisfaction with life with reduced risk of heart disease and stroke.

A survey of more than 2,015 people conducted by the British research company Ipsos MORI revealed that people believe the following five factors are most likely to enhance happiness (they are listed in order of importance).

1) More time with family2) Earning double what I do now3) Better health4) More time with friends5) More traveling

Are they right?

Looking at the research, and sticking with just these five options, the order of importance looks more like this:

1) Better health
2) More time with friends
3) More time with family
4) More traveling
5) Earning double what I do now

Health

How people value health varies dramatically based on age, which probably isn’t too much of a surprise. Tali Sharot points out that:

Only 10 percent of respondents from fifteen to twenty-four years old rated better health as one of the top five factors that would make them happy, as opposed to 45 percent of people over seventy-five.

I find that an increase in the level of social involvements is worth up to an extra £85,000 a year in terms of life satisfaction. Actual changes in income, on the other hand, buy very little happiness.

Money

…people in the US who make $75,000 a year…are just as happy as those who make $150,000. Any higher income is not going to increase emotional well-being, but a lower income is associated with less emotional well-being, Scollon explained.

We overestimate how happy we will be on our birthdays, we underestimate how happy we will be on Monday mornings, and we make these mundane but erroneous predictions again and again, despite their regular disconfirmation.

Do you dread going to work, going to the gym or to that family gathering? How do you really feel when you finally get there or after? It’s often very different from your prediction. Some things that look like an enormous chore to do in the future are actually very fulfilling in the moment and afterward… like, oh, blogging.

Stop trusting your memory. Write things down.

This trio of studies suggests that when people are deprived of the information that imagination requires and are thus forced to use others as surrogates, they make remarkably accurate predictions about their future feelings, which suggests that the best way to predict our feelings tomorrow is to see how others are feeling today.

Research has revealed, predictably, that pessimism is maladaptive in most endeavors: Pessimistic life insurance agents make fewer sales attempts, are less productive and persistent, and quit more readily than optimistic agents. Pessimistic undergraduates get lower grades, relative to their SAT’s and past academic record, than optimistic students…

But it turns out many of the common methods for becoming more positive are bunk. Standing in front of the mirror saying cheery things doesn’t help.

Pessimists can in fact learn to be optimists, and not through mindless devices like whistling a happy tune or mouthing platitudes (“Every day, in every way, I’m getting better and better”), but by learning a new set of cognitive skills… We have found that merely repeating positive statements to yourself does not raise mood or achievement very much, if at all.

So are we doomed if we’re not naturally optimistic? Don’t worry, Frodo, we’ll get you back to the Shire.

Here are the 4 steps that can turn pessimists into optimists — or even make mildly positive people very positive.

The 3 P’s

It all comes down to what researchers call “explanatory style.” When bad things happen, what kind of story do you tell yourself?

There are three important elements here. Let’s call them the 3 P’s: permanence, pervasiveness and whether it’s personal.

The defining characteristic of pessimists is that they tend to believe bad events will last a long time, will undermine everything they do, and are their own fault. The optimists, who are confronted with the same hard knocks of this world, think about misfortune in the opposite way. They tend to believe defeat is just a temporary setback, that its causes are confined to this one case. The optimists believe defeat is not their fault: Circumstances, bad luck, or other people brought it about. Such people are unfazed by defeat. Confronted by a bad situation, they perceive it as a challenge and try harder.

And when good things happen, the situation reverses:

Pessimists think good things will be short-lived, are rare and random.

Optimists think good things will last forever, are universal and of their own doing.

What’s the ultimate result of this? Pessimists often quit. Life feels futile. And when life feels futile, you stop trying and frequently get depressed.

So now we understand the kind of thinking that underlies these positions… but how do you go from one to the other?

Research shows you should act like a crazy person… Okay, I’ll be more specific.

Argue With Yourself

How do you train a puppy not to poop on the carpet? It helps to catch him in the act.

When things don’t go your way, that voice in your head is going to tell a story. Check which explanatory style it’s using.

Is it saying bad things are going to be permanent and universal? Are you blaming yourself? That’s pessimism.

Watch your thinking and flip the script on the three:

Change permanent explanations to more fleeting ones.

Change pervasive responses to specific ones.

Change personal reasoning to not-all-my-fault perspectives.

This doesn’t have to mean lying to yourself.

Do you really “always screw this up”? That’s probably not accurate. Was it100% your fault? Almost everything has multiple causes.

By remembering the 3 P’s and flipping the script, research shows you can make yourself more optimistic over time.

But that raises an interesting question: why would anyone ever want to be pessimistic? There’s a reason.

Pessimists Are More Accurate… But Pay A High Price

Plain and simple, pessimists see the world more accurately than optimists do.

…judiciously employed, mild pessimism has its uses…. The company also needs its pessimists, the people who have an accurate knowledge of present realities. They must make sure grim reality continually intrudes upon the optimists. The treasurer, the CPAs, the financial vice-president, the business administrators, the safety engineers— all these need an accurate sense of how much the company can afford, and of danger. Their role is to caution, their banner is the yellow flag.

Pessimism is seen as a plus among lawyers… The ability to anticipate the whole range of problems and betrayals that non-lawyers are blind to is highly adaptive for the practicing lawyer who can, by so doing, help his clients defend against these far-fetched eventualities.

But while it makes lawyers better at their job, it comes at a high price.

The ability to anticipate the whole range of problems and betrayals that non-lawyers are blind to is highly adaptive for the practicing lawyer who can, by so doing, help his clients defend against these far-fetched eventualities. If you don’t have this prudence to begin with, law school will seek to teach it to you. Unfortunately, though, a trait that makes you good at your profession does not always make you a happy human being.

Excuse the pun, but there is an upside to pessimism. So when should you be optimistic and when should you be pessimistic?

Ask Yourself “What’s The Cost Of Being Wrong Here?”

If I’m up for double murder I want a pessimistic attorney looking for all the problems in my case.

The engineer designing my car better be a rampant pessimist — his mind eagerly identifying every imaginable point of failure.

But do I want to walk around all day imagining the worst that could possibly happen? No way.

Whenever you’re unsure if optimism is the right way to handle something ask yourself: “What’s the cost of being wrong here?”

The fundamental guideline for not deploying optimism is to ask what the cost of failure is in the particular situation. If the cost of failure is high, optimism is the wrong strategy. The pilot in the cockpit deciding whether to de-ice the plane one more time, the partygoer deciding whether to drive home after drinking, the frustrated spouse deciding whether to start an affair that, should it come to light, would break up the marriage should not use optimism. Here the costs of failure are, respectively, death, an auto accident, and a divorce. Using techniques that minimize those costs is inappropriate. On the other hand, if the cost of failure is low, use optimism.

Seligman calls this balance “flexible optimism.”

Pessimism is a tool. Have it in the garage like a snowblower. You don’t need it every day but occasionally it’s valuable to have around.

So how do we tie all this together?

Sum Up

Want to be more positive? When problems arise, dispute negative thoughts by making sure your explanations are

Transitory, not permanent.

Specific, not pervasive.

And the causes are external, not “all-my-fault.”

Pessimism can be a useful tool when the downside is big, but used as your default it makes life feel futile and hopeless.

And what does research say predicts achievement better than intelligence, grades or personality?

Write down three things that went well today and why they went well…Writing about why the positive events in your life happened may seem awkward at first, but please stick with it for one week. It will get easier. The odds are that you will be less depressed, happier, and addicted to this exercise six months from now.

Here’s what’s really fascinating: the opposite works too. Keep a record of bad things and you’ll make yourself increasingly miserable.

I immediately think about my research credentials, a trick I developed after discovering that getting people to think about aspects of themselves that are conducive to success can actually be enough to propel them to a top performance and prevent choking.

Your resume is designed to make you sound impressive to others — and it can have the same effect on you.

…Mitchell et al (1997) found that people viewed the vacation in a more positive light before the experience than during the experience, suggesting that anticipation may sometimes provide more pleasure than consumption simply because it is unsullied by reality.

Got nothing you’re looking forward to? No problem. Make some fun plans — and then write those down.

4) MEANING IN LIFE

Write down a favorite memory that makes you feel good.

Research shows we can add a feeling of meaning to our lives by being nostalgic:

The present research tested the proposition that nostalgia serves an existential function by bolstering a sense of meaning in life. Study 1 found that nostalgia was positively associated with a sense of meaning in life. Study 2 experimentally demonstrated that nostalgia increases a sense of meaning in life.

When life doesn’t make sense, get lost in that memory for a little while. Nostalgia restores a sense of purpose when times are hard.

5) SUCCESS

When we stare at someone we want to become and we have a really clear idea of where we want to be, it unlocks a tremendous amount of energy. We’re social creatures, and when we get the idea that we want to join some enchanted circle up above us, that is what really lights up motivation. “Look, they did it. I can do it.” It sounds very basic, but spending time staring at the best can be one of the most powerful things you do.

The hero doesn’t even have to be a real person. Batman? Wolverine? They’ll do just fine. Even fictional characters we admire motivate us to be like them:

…researchers found that people who strongly identified with a fictional character who overcame obstacles to vote were significantly more likely to vote in a real election several days later.

Did you have a superhero poster on your bedroom wall when you were a kid? You were on to something. ;)

1) You Bounce Back Better From Tougher Problems

People rationalize divorces, demotions, and diseases, but not slow elevators and uninspired burgundies. The paradoxical consequence is that people may sometimes recover more quickly from truly distressing experiences than from slightly distressing ones (Aronson & Mills, 1958; Gerard & Mathewson, 1966; Zimbardo, 1966)…

2) Regret Is Not That Scary

We anticipate regret will be much more painful than it actually is. Studies show we consistently overestimate how regret affects us.

3) “What Does Not Kill You Makes You Stronger” Is Often True

In a month, 1,700 people reported at least one of these awful events, and they took our well-being tests as well. To our surprise, individuals who’d experienced one awful event had more intense strengths (and therefore higher well-being) than individuals who had none. Individuals who’d been through two awful events were stronger than individuals who had one, and individuals who had three— raped, tortured, and held captive for example— were stronger than those who had two.

Thanks to this study, today we can say for certain, not just anecdotally, that great suffering or trauma can actually lead to great positive change across a wide range of experiences. After the March 11, 2004, train bombings in Madrid, for example, psychologists found many residents experienced positive psychological growth. So too do the majority of women diagnosed with breast cancer. What kind of positive growth? Increases in spirituality, compassion for others, openness, and even, eventually, overall life satisfaction. After trauma, people also report enhanced personal strength and self-confidence, as well as a heightened appreciation for, and a greater intimacy in, their social relationships.

5) Rarely In Life Are You Limited By Your Genes

Benjamin Bloom, an eminent educational researcher, studied 120 outstanding achievers.They were concert pianists, sculptors, Olympic swimmers, world-class tennis players, mathematicians, and research neurologists. Most were not that remarkable as children and didn’t show clear talent before their training began in earnest… Bloom concludes, “After forty years of intensive research on school learning in the United States as well as abroad, my major conclusion is: What any person in the world can learn, almost all persons can learn, if provided with the appropriate prior and current conditions of learning.” He’s not counting the 2 to 3 percent of children who have severe impairments, and he’s not counting the top 1 to 2 percent of children at the other extreme… He is counting everybody else.

6) You Don’t Need To Win The Lottery To Be Happy

Ed Diener and Martin Seligman screened over 200 undergraduates for levels of happiness, and compared the upper 10% (the “extremely happy”) with the middle and bottom 10%. Extremely happy students experienced no greater number of objectively positive life events, like doing well on exams or hot dates, than did the other two groups (Diener & Seligman, 2002).

7) Helping Others Helps You

Undergrads who wrote letters of encouragement to “at-risk” middleschoolers advising them to persevere and that intelligence “is not a finite endowment but rather an expandable capacity” became, themselves, happier and better in school for months afterward.

Truth is, there were no middleschoolers. Just writing the letters achieved these results.

Did these letters help the middle school students bounce back from adversity? It’s impossible to say — the letters were never delivered. But the mere experience of writing them had a lasting impact on the college students themselves. Months later, the letter writers were still reporting greater enjoyment of school than were other Stanford undergrads. Their grade point averages were higher, too, by a full third of a point on a four-point scale.

…the brain does not want the body to expend its resources unless we have a reasonable chance of success. Our physical strength is not accessible to us if the brain does not believe in the outcome, because the worst possible thing for humans to do is to expend all of our resources and fail. If we do not believe we can make it, we will not get the resources we need to make it. The moment we believe, the gates are opened, and a flood of energy is unleashed. Both hope and despair are self-fulfilling prophecies.

10) Sometimes, Empathy Beats Objectivity

There is a great study of radiologists by Turner and colleagues showing that when radiologists just saw a photo of the patient whose x-ray they were about to scan, they empathized more with the person, seeing that person as more of a human being as opposed to just an x-ray. As a result, they wrote longer reports, and they had greater diagnostic accuracy, significantly.

And One More:

11) The Most Powerful Goals Aren’t About Being Perfect; They’re About Getting Better

Get-better goals increase motivation, make tasks more interesting and replenish energy. This effect even carries over to subsequent tasks.

Get-better goals, on the other hand, are practically bulletproof. When we think about what we are doing in terms of learning and mastering, accepting that we may make some mistakes along the way, we stay motivated despite the setbacks that might occur…Research shows that a focus on getting-better also enhances the experience of working; we naturally find what we do more interesting and enjoyable when we think about it in terms of progress, rather than perfection.

Poll: Americans More Optimistic About Jobs

Joshua Lott—Getty ImagesA woman seeking employment fills out an application at a job fair at the Matrix Center April 23, 2014 in Detroit, Mich.

30% say now is a good time to find a job, up from 8% in 2010

More Americans are optimistic about the job market this month than at any time since the 2008 financial crisis, according to a new poll, with 30% saying now is a good time to find a quality job.

That marks a significant improvement from the 8% who said they were optimistic about the job market in 2010, but it’s still a drop from the pre-2008 highs of almost 50%. And even though almost a third of Americans are optimistic, two-thirds still say the job market is lackluster; 66% of Americans say it’s not a good time to hunt for employment.